Lack of dairy regulation has insulated the economy from price shocks, says English

Thursday 23rd July 2015

Light regulation in the New Zealand dairy industry has insulated the wider economy from the sharp decline in prices for the country's largest export commodity, according to minister of finance Bill English.

Prices for whole milk powder, the country's key commodity export, have plunged this year and dropped an unexpectedly large 10.7 percent in in the GlobalDairyTrade auction last week, sending the kiwi dollar to six-year-lows. Dairy prices are now expected to remain lower for longer than previously forecast, amid higher global supplies, weak demand in China and an import ban in Russia on European dairy products, which are being sold into other markets.

Speaking at the Commerce Commission's annual conference in Wellington, English said sound regulation had built a more resilient economy, and pointed to "the dairy price shock" as an example.

"I don't think there is much doubt in the past decades when New Zealand was more regulated, a price shock to the extent of the current change in milk prices would have paralysed this economy," English told the Competition Matters 2015 conference. "In fact we saw that in the late '80s and early '90s in the agricultural sector when price subsidies were removed, a price shock in that case because of a policy decision. That paralysed communities and changed them quite dramatically because they lacked the resilience that goes with moving with the market and being subject to the competitive forces, day to day, week to week."

The weaker prices come as local production is rising heading into the country's peak supply period in October.

Fonterra Cooperative Group, the world's largest dairy exporter, is expected to lower its forecast payout to farmers for this season following its board meeting next month. The Auckland-based company currently forecasts a payout of $5.25 per kilogram of milksolids for the 2015/16 season, from $4.40/kgMS last season and a record $8.40/kgMS the previous season. Economists expect a payout of between $3.75/kgMS to $5/kgMS for this season, while Dairy NZ estimates $5.70/kgMS is the industry average breakeven point for most farmers.

English didn't detail the economic outlook, saying he'll leave that to Reserve Bank governor Graeme Wheeler, who cut the official cash rate 25 basis points to 3 percent this morning.

Wheeler kicked off an easing cycle last month as inflation stayed below his target band and falling dairy prices lead to a deterioration in the country's terms of trade. Today the governor said a lower kiwi dollar is needed to prop up the nation's export sector.

The central bank has said a second year of low payouts would be a concern for the New Zealand economy, especially for some 25 percent of dairy farmers currently trading with negative cashflow.

BusinessDesk.co.nz

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